Monday, October 04, 2010

Now that Congress has recessed until at least after the November elections, it is a good time to assess where things stand now, and what ought to come next, with regard to the proposals for government-imposed net neutrality regulations.

Since shortly after the D.C. Circuit's Comcast decision last April, which strongly casts doubt on the Federal Communications Commission's authority to regulate Internet service providers, I have said that, if the FCC is to take any action at all to impose net neutrality mandates, it should do so only if Congress explicitly grants it such authority. And I have suggested that any such legislation granting the FCC authority to regulate the practices of Internet providers should be narrowly circumscribed. In mid-June, I suggested model language, which you can find here, to accomplish this purpose.

Under my proposal, the FCC would be given authority "to prohibit broadband Internet service providers from engaging in acts or practices that are determined to constitute an abuse of substantial, non-transitory market power and which cause harm to consumers." And the agency's rulemaking authority would be narrowly circumscribed; its authority over broadband providers would be exercised primarily through adjudication of individual complaints alleging abusive practices.

Importantly, I have urged since the day after the Comcast decision that, while Congress deliberates on broadband policy in the post-Comcast environment, the Commission should suspend consideration of all proposals to impose net neutrality mandates by administrative fiat. This certainly includes consideration of Chairman Julius Genachowski's "Third Way" proposal which would classify broadband Internet providers as common carriers under Title II of the Communications Act. Title II is the regulatory regime that applied to Ma Bell and other dominant telephone companies last century when narrowband providers operated in a monopolistic environment.

Last week, a draft bill written by House Energy and Commerce Chairman Henry Waxman surfaced. In a statement issued shortly thereafter, I said that the draft bill contained "positive elements" and that "[o]verall, the draft bill provides a basis for Congress moving forward to consider adoption of broadband legislation that gives direction to the Commission." And, I emphasized, "[i]n the meantime, it certainly doesn't make sense for the FCC to act on its own."

I identified as positive elements the bill's requirement that the FCC enforce net neutrality requirements through adjudication of individual complaints and not rulemaking; its recognition of the importance of allowing Internet providers to engage in reasonable network management practices; its prohibition on the FCC's continuing its rulemaking to classify Internet providers as common carriers under Title II; and the bill's December 2012 expiration date.

In contrast to these positive elements, I expressed concerns about the bill's provision prohibiting wireline broadband Internet providers from "unjustly or unreasonably discriminat[ing] in transmitting" traffic. I said that if the discrimination provision were interpreted "too rigidly by the FCC, this legacy common carrier-type restriction can inhibit development of new, differentiated services in response to evolving consumer demand." Therefore, I urged that "any discrimination prohibition should explicitly require a showing of consumer harm as a prerequisite to any agency remedial action."

In the few days remaining before the congressional recess, without the prospect of any hearings or time for further deliberation, no Republican signed on to Chairman Waxman's draft, and he did not actually introduce it as a bill. Instead, he issued a statement outlining the provisions of his draft, and his statement concluded in this way: "I do not close the door on moving legislation this Congress….If our efforts to find bipartisan consensus fail, the FCC should move forward under Title II. The bottom line is that we must protect the open Internet. If Congress can’t act, the FCC must."

So, this is where things stand now in the long-running net neutrality saga (some might say soap opera). The question is: What ought to come next?

Here's my view.

Although I do not believe Chairman Waxman's draft bill should be enacted into law without modifications, I do think, as I said, that it contains positive elements and provides a basis for continuing legislative efforts. The circulation of the draft should have the effect of clarifying, perhaps in ways both intended and unintended, certain fundamental principles that should guide the way forward.

First, the draft bill should cement the bipartisan consensus that has been growing steadily since the April Comcast decision that the FCC should not adopt net neutrality mandates in the absence of legislation granting the agency the authority to do so. No one is arguing that there is any present market failure or existing pattern of abusive practices causing consumer harm that requires immediate remedial action. Chairman Genachowski speaks of the need to "preserve the freedom and openness of the Internet." Even Free Press, the most ardent, vociferous net neutrality advocate, says the government needs to act "to ensure that the Internet remains open for everyone." In other words, the claim of net neutrality advocates is not that it is urgent for new laws or regulations to be adopted to remedy a market failure that has led to a closed Internet; rather they want to take action to, in their words, ensure that the Internet remains open in the future.

In this circumstance, and having in mind the law of unintended consequences and the principles of cost-benefit analysis, a persuasive case can be made that neither the FCC nor Congress ought to take any action regarding net neutrality unless and until a marketplace failure manifests itself or consumer harms become evident.

But assuming the three member Democrat majority at the FCC continues to threaten, albeit ill-advisedly, to impose net neutrality mandates, it makes sense for Congress to continue its efforts to fashion appropriate legislation. Because as long as there is the prospect that Congress may legislate in this area, it ought to be unthinkable for the agency to charge ahead with the ill-conceived Title II classification proposal that would convert Internet providers into common carriers.

Finally, an important point on developing legislation. Consistent with the model language I suggested in June, the troublesome provision on discrimination in the Waxman draft bill should be replaced with one that requires proof that the Internet provider alleged to have committed a discriminatory practice possesses substantial market power and that the alleged abusive practice causes consumer harm. This heightened standard will require the FCC, before imposing any regulatory sanction on an Internet provider, to engage in a rigorous economic analysis that explicitly takes into account marketplace competition and general consumer welfare. Despite any conclusions to the contrary that the major Internet providers may have reached, I fear that, absent such a rigorous standard, the FCC will be left with overly broad discretion to regulate Internet providers in ways that may stifle innovation and investment.

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Well, there you have my views on the way forward. And, from my perch running a free market-oriented think tank, I certainly hope they are persuasive. Be that as it may, I don't get to write the communications laws; just try to persuade. But the Hill folks who do have an awful lot of sway over writing the communications laws will be the featured speakers at the Free State Foundation lunch seminar on October 12. All the event details are here. I am sure we will have a spirited discussion concerning what broadband legislation should look like, including plenty of audience participation.